Lesson Overview

IWM Iron Butterfly Adjustment

As IWM has continued to rally higher near expiration, we looked to reduce our risk by rolling up our short put closer to the market for a higher credit. The put was already near worthless and served us no purpose to hold for the rest of the month.This credit helps minimize our loss should IWM stay at this level.

This credit that we got from rolling up one side helped us minimize our loss should IWM stay elevated through the rest of the expiration cycle.

More Discussion

Was This Helpful? Add Comments/Questions

Show Video Transcript +

In tonight’s video, I just want to cover the one adjustment trade that we had to our current March IWM iron butterfly. We had the IWM butterfly in March. We’re not talking about the trade that we have going on in April because we do have a call calendar in April for IWM.

We’re just talking about that iron butterfly that we have in March. Now, as the market has rallied higher, what we ended up doing today is rolling up our short put option from the 117 strike which was originally where this iron butterfly was centered.

And I’ll show you that here in a second on the charts. We rolled that up to the 121 strike. And that rolled it closer to the market, we took in a lot more credit to do that, and that $70 credit helped offset the overall risk that we had originally in the trade.

Here's roughly what it looks like. And I tried it back into this calculation. I just want to get this video out to you guys. But this is basically what this iron butterfly looked like when we entered it.

We’re taking a really big credit, it’s very wide, and you can see we’re pinning everything right around the 17 strike. Now, as the markets traded much higher than that, it’s traded up to 123 today, it had a very big move.

What we’re doing here is we’re taking that 117 put options that’s now pretty much worthless because the markets are rallying higher and we’re rolling it closer to the 121.

And what that does is that takes in a much bigger premium, and that premium helps reduce our overall risk on this trade by the credit that we received.

In this case, what we’re going to do here is we’re going to go ahead and sell out the 121 put and then we just buy this one back.

And now when that happens, and we take in that credit to do that, now you can see that our profit and loss diagram looks like this.

And it doesn't have the accurate profit and loss here because it doesn't factor in the gain that we had on this one, so I understand that, and I know that we get a lot of questions on that. Thinkorswim doesn’t go back and then retroactively adjust for these positions.

But our original risk was a little bit over $100 I think, and we reduced it by the $.77 credit that we received. And now you can see we’ve got this unbalanced iron condor where we have a much more limited risk to this side.

But if the market does happen to turn around in the next couple of weeks, we stand to turn this thing around and make some money on this trade. It ends up being a pretty good-looking adjustment.

That’s the way that we adjusted it. It’s probably the last adjustment that we’ll make for this position. We’re not going to do anything else. That’s about as far as we want to go right now in making this adjustment.

A very quick video, a very easy video. The key here is reducing risk wherever possible. That's what we did by taking in that credit. It still leaves us an opportunity to make some money even if the market falls in the next week and a half before expiration.

As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them right below. And until next time, happy trading!

eBook Download

The "Ultimate" Options Guide

Ultimate Options Strategy Guide

The step-by-step guide on how to set up each of the top 18+ options strategies we trade to generate monthly income. Read the whole strategy guide in less than 30 mins and have it forever to reference.

Download PDF

Join More Than 47,345 Members

Membership is always free & you can upgrade anytime to unlock our live trades.